One of the world’s largest sovereign wealth funds has warned that investment returns over the next two decades will be “significantly lower” than in the past 30 years.

Singapore’s GIC, which manages more than $100bn (€90.2bn) in assets, said it expected a difficult investment environment, with modest growth prospects, greater uncertainty and more volatility in the global economy and markets.

The bleak outlook was laid out in GIC’s latest annual report as the fund celebrates its 35th anniversary.

The fund has delivered an average return of 4% per year above the global inflation rate over the 20 years to March 2016 from a global portfolio of investments in six asset classes, including real estate and infrastructure.

Lim Chow Kiat, GIC’s deputy group president and group CIO, warned that the returns achieved since 1996 would be challenged by uncertainties brought on by the low-yield environment investors now face.

“These difficult investment conditions can stretch for the next 10 years,” he said.

GIC outlined three scenarios it feels will have an impact on returns in future years – “back to normal” global growth, stagnation and stagflation.

“We expect that, over 20 years, taking into account both starting valuations and the fundamentals in this ‘back to normal’ world, real annualised returns on global bonds would be 0.1%, and those of global equities around 3%,” its report states. 

“The global economy could be plunged into stagnation for a long period of time, either by a US recession, the euro-zone break-up or a China hard landing.”

The report adds: “Political and social forces will also push for deglobalisation, resulting in trade and investment restrictions.”

GIC said high debt, easy monetary policy and populism could lead to stagflation in the global economy.

Lim said GIC was prepared for this protracted period of all-time low interest rates, modest global growth prospects and high valuations of financial assets.

“Even as we expect the real returns for the GIC portfolio to be lower going forward, we aim to take advantage of our long-term horizon, skills and global reach to find attractive investment opportunities,” he said.

He said the fund’s long-term strategy also meant its portfolio had to be significantly different from one comprising global equities and global fixed income market indices.

“This implies our investment performance cannot be expected to surpass the global market indices every year or every five or 10 years,” he said.

“What is critical is that the GIC portfolio will produce positive real returns and surpass the global indices over the longer term.”

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